3.5.2.2 Analysing Financial Performance: How to Analyse Timings of Cash Inflows and Outflows? Flashcards
What is working capital?
Assets that can be turned into cash quickly e.g. inventories of finished products and cash outflows - these determine the working capital.
What is the formula for working capital?
Current assets - Current liabilities.
What can working capital indicate?
The firms scope to pay its long term debts, because it includes a firms most liquid assets (current), but excludes its non-current assets.
What is stage one of the working capital cycle?
Cash outflow to purchase raw materials (delayed if credit terms are provided by suppliers).
What is stage two of the working capital cycle?
Cash outflow to fund production of finished goods.
What is stage three of the working capital cycle?
Cash outflow on storage as goods are held in stock.
What is stage four of the working capital cycle?
Cash inflow as goods are sold (delayed if credit terms are given to customer).
What are the main elements of the working capital cycle?
Inventories.
Receivables.
Payables.
What is the formula to calculate the length of the working capital cycle?
(Inventory days + receivable days) - payable days.
What is the ideal working capital situation?
Low level of inventory that sells quickly.
Receivables paying very quickly.
Long time to pay payables.
What factors influence the length of the working capital cycle?
Nature of the product.
Durability of the product.
Efficiency of the product.
Lead time.
Customer expectations.
competition. `
What factors influence the time taken for receivables to be paid?
Nature of the market.
Type of product.
Bargaining power.
Why is the longer the period of credit offered to a business better?
Means that payment can be delayed.
What factors influence payables?
The same as receivables.
Nature of the market.
Type of product.
Bargaining power.
